US yields drop after Treasury offers liquidity support

WASHINGTON, Aug 19 (Reuters) - Yields on ‌long-dated U.S. Treasuries ​held onto ​earlier declines on Wednesday afternoon, with the increased demand following an announcement that the Treasury Department would double the size of liquidity support buyback operations ‌for longer-dated notes and bonds.

The pressure on U.S. borrowing costs eased as longer-dated euro ⁠zone bonds retreated from multi-year highs hit during a global selloff on fears about governments' deteriorating fiscal situations, ‌supply shocks and inflation fears.

At the ‌same time, efforts to end the U.S.-Iran conflict remained stalled on Wednesday and crude prices continued to nudge upwards.

Thomas Simons, chief U.S. economist at Jefferies, said Wednesday's news ​was unusual because it did not come as part of the Treasury Department's most recent quarterly refunding announcements, which "suggests that at any time in the future they could ⁠make more changes."

Under the current administration, the Treasury Department has been careful to limit the size of long-dated auctions and ​could feel the need to go further than that, Simons added.

"I think that there is at least some increase in expectations that long-end ​auction sizes could actually be cut at some ‌point," Simons said.

An auction of 20-year Treasuries showed mediocre demand, with a softening bid-to-cover ratio and elevated yields.

Also on Wednesday, the Federal Reserve ⁠released minutes from its July 28-29 meeting at which "many" policymakers said they felt interest rate hikes could become necessary if inflation does not decline. However, Simons said economic data released since the meeting ⁠meant the minutes now give an outdated economic picture.

The yield on the benchmark U.S. 10-year Treasury note was last ​down 5.1 basis points to 4.655%. The yield on the 30-year bond fell 8.9 basis points to 5.196%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on 2- and 10-year Treasury notes, seen ‌as an indicator of economic expectations, was at a positive 47.2 basis points.

The 2-year U.S. Treasury yield, which typically moves in step with interest rate expectations ‌for the Fed, rose 0.6 basis points to 4.181%.

The breakeven rate on 5-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.286% ⁠after closing at 2.288% on August 18.

The 10-year ‌TIPS breakeven rate was last ​at 2.304%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Douglas Gillison in Washington; editing by Philippa Fletcher and ‌Paul Simao)

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